New rate mechanism designed to encourage energy efficiency programs
The Idaho Public Utilities Commission has approved a yearly rate adjustment designed to remove financial disincentives for Idaho Power Company to implement energy efficiency programs.
The rate adjustment, called a Fixed Cost Adjustment (FCA), is approved only on a pilot basis, subject to modification or removal by the commission.
Currently, when Idaho Power initiates programs designed to encourage customers to reduce their energy use, it negatively impacts energy sales. If customers significantly reduce their consumption through conservation efforts, the company may not recover its fixed costs of serving customers.
The FCA will be a yearly adjustment to electric rates that would prevent the company from losing money when it invests in energy efficiency programs. Often referred to in the industry as “decoupling,” the FCA removes the link between energy efficiency and energy sales by allowing the company to recover its fixed costs regardless of the volume of energy sales.
Initially, the three-year pilot program applies only to residential and small-business customers.
When the commission sets rates, it determines the annual revenue needed by the company to recover its costs. During the rate-setting process, the commission determines the fixed cost that should be recovered from residential and commercial customers. The FCA mechanism will allow for a “true-up” between fixed costs actually recovered through rates and the fixed cost amount authorized by the commission for recovery in the company’s most recent rate case. If the fixed cost recovered were less than the authorized fixed-cost rate, customers would get a surcharge that can be no higher than 3 percent. If the company collects more in fixed costs than authorized by the commission, customers would get a credit. The surcharge or credit would last one year when the FCA would again be updated. According to Idaho Power’s estimates, the impact on rates for average residential customers would typically be $1 or less a month. The fixed-cost adjustment would be made at the same time the company adjusts bills for its annual power cost adjustment (PCA), which allows the company an opportunity to recover above-normal costs of supplying power.
In exchange for removal of the financial disincentive, the FCA requires Idaho Power to significantly increase the size and availability of energy efficiency programs and to support more energy efficient building and energy codes.
The pilot program is the result of a negotiated settlement between Idaho Power, commission staff and the Northwest Energy Coalition. In its comments, the Northwest Energy Coalition said “decoupling results in a better alignment of shareholder, management and customer interests to provide for more economically and environmentally efficient resource decisions.”
The Idaho Citizens Action Network opposed the FCA mechanism as one that would allow Idaho Power to receive additional revenue without any proof of need. ICAN sought a more thorough review of the program and public hearings.
In its findings, the commission said the program will require close monitoring, which is why the FCA is a pilot program. Many of the issues raised by ICAN will be considered in the commission’s assessment of the program during the pilot period, the commission said.
“Promotion of cost-effective energy efficiency … is an integral part of least-cost electric service,” the commission said. In addition to their environmental benefits, energy efficiency programs benefit all customers because they reduce or eliminate the need for the power company to meet load growth by adding new generation plants or buying additional power from the wholesale market.
On the same day the commission approved the FCA mechanism, it also approved a pilot program that should encourage the construction of energy-efficient homes.
Idaho Power currently provides an incentive payment of $750 to builders for each home built to meet energy efficiency standards set forth by the ENERGY STAR® Homes Northwest program. The program approved this week provides incentive payments or penalties to Idaho Power for meeting or not meeting specified participation goals in the program. Under this pilot, the company will provide marketing to encourage more participation in the program.
On average, homes constructed to the ENERGY STAR® standard in Idaho will save an estimated 2,078 kilowatt hours annually, or 30 percent greater energy efficiency than existing Idaho residential building codes.
Under this pilot program, Idaho Power would receive an incentive payment if the market share of homes constructed under the ENERGY STAR® program exceeds 7 percent of the total number of residential building permits issued in Idaho Power’s service territory in 2007, 9.8 percent of total service area homes in 2008 and 11.7 percent of total service area homes in 2009. The amount of the incentive would equal the percentage that exceeds the target. For example, if Idaho Power were able to achieve 105 percent of the 7 percent target for 2007, it would receive a payment equal to 5 percent of the total program net benefits. The incentive would be capped at 10 percent of program net benefits. Penalties would be levied for any year Idaho Power fails to reach the market share of 4.9 percent program participation it achieved in 2006. Impact on customers’ rates would be negligible.
The Industrial Customers of Idaho Power opposed the program, saying customers should not be required to pay Idaho Power to induce it to implement cost-effective conservation activities. The Northwest Energy Coalition endorsed the program because it is structured in such a way that Idaho Power will need to show excellent performance in order to received incentive payments.
A full text of the commission’s orders, along with other documents related to these cases, are available on the commission’s Web site. Click on “File Room” and then on “Electric Cases” and scroll down to the above case numbers.